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New 22 CFR 126.4 ITAR exemption for transfers by or for US government: six things you need to know

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After years of waiting, the new 22 CFR 126.4 International Traffic in Arms Regulations (ITAR) licence exemption for transfers of defence articles and services by or for the US government came into effect on 19 April 2019.

While the introduction of the revised 22 CFR 126.4 exemption is largely positive for exporters, there are a few new boxes to check.(1)

Six things you need to know

Bills of lading
Exporters no longer have to explain what a government bill of lading is, as the requirement in the old 22 CFR 126.4(a) that "all aspects of a transaction (export, carriage, and delivery abroad) are affected [sic] by a United States Government agency or when the export is covered by a United States Government Bill of Lading" has been removed.

Use of revised 22 CFR 126.4(a)
Importantly, 22 CFR 126.4(a) should be used only by US government agencies and departments.

The new exemption is divided into two parts. 22 CFR 126.4(a) covers transfers by a US government department or agency. Thus, companies that are not part of the US government cannot make use of this section. That said, US government contractors can use this section, but only for official use by a US government department or agency:

within a US government-controlled facility;

when a US government employee is responsible for ensuring that the defence article is:

not diverted; and

used only within the scope of the contractual relationship; or

when use of the exemption is authorised by the deputy assistant secretary of state for the Directorate of Defence Trade Controls (DDTC) at the request of a US government department or agency.

In other words, 22 CFR 126.4(a) is of limited use for most US government contracts.

Can contractors use 22 CFR 126.4(a)(1)?
The short answer is yes – if they are careful. However, the new 22 CFR 126.4(b) may be a better option, as US government contractors can use this exemption with written consent. 22 CFR 126.4(b) authorises US government contractors to export, re-export, retransfer or temporarily import a defence article or provide a defence service to:

a US government department or agency at its request; or

an entity other than the US government with a written direction from a US government department or agency or pursuant to an international agreement or arrangement.

What's the catch?
There is no requirement that the US government effect an export or that a contractor obtain a government bill of lading. Further, the situation need not be an emergency wherein the parties involved have tried and failed to get a licence (as under the old 22 CFR 126.4(c)).

While the new 22 CFR 126.4(b) is excellent news, a number of important boxes must be checked before the exemption can be used:

If the exemption is not going to the US government, written consent must be obtained. Further, this consent cannot be provided by just anyone at the agency. The DDTC ominously states in its preamble that each "department or agency will determine for itself who is authorized to issue such written directions". Therefore, contractors may still receive written directions and execute them before realising that the wrong person gave the direction. As such, this is an important box to check before using the 22 CFR 126.4(b) exemption to export goods.

If the exemption is not going to the US government, it must be for one of the activities set out in 22 CFR 126.4(a)(1) to (4).(2) While the scope of these activities is broad, parties must check this box before using the exemption.

Exporters must file their electronic export information referencing the exemption unless the export is going via US diplomatic pouch or government aircraft, vehicle or vessel.

The exemption does not apply to 22 CFR 126.1 proscribed countries (eg, Afghanistan, Iraq and China). However, in true ITAR fashion, there is an exception to this requirement (see below).

Finally, if an exporter changes the end use or end user of a defence article (once exported under the 22 CFR 126.4 exemption) to any party or use not authorised by the exemption, they must obtain a licence or other approval from the DDTC. For example, exporters must keep track of any night vision goggles or personal protective equipment that have been exported using this exemption; they cannot simply disappear or be transferred in-country without proper authorisation.

Application of 22 CFR126.1 for proscribed countries
While the DDTC has stated that no 22 CFR 126.1 proscribed countries can make use of the exception, these countries can use three 22 CFR 126.4 exemptions. However, this will be permitted only where an export is made to or by the US government for cooperative projects and programmes.

The amended 22 CFR 126.1 reads as follows:

The exemptions provided in this subchapter, except § 123.17 of this subchapter and §§ 126.4(a)(1) or (3) and (b)(1) and 126.6, or when the recipient is a US Government department or agency, do not apply with respect to defense articles or defense services originating in or for export to any proscribed countries, areas, or persons. (Emphasis added.)

In short, if the recipient is the US government in (for example) Iraq or Afghanistan (22 CFR 126.4(a)(1) and (b)(1)) – or it is to carry out a cooperative project, programme or other activity in furtherance of an agreement or arrangement and the US government is responsible for the export – the exemption can be used for a 22 CFR 126.1 proscribed country.

Unfortunately, it is highly likely that exporters will be confused and export to the Afghan forces at the direction of the US government under the 22 CFR 126.4(b)(2) exemption, and then be required to immediately disclose to the US government because Afghanistan is still a 22 CFR 126.1 proscribed country.

Revamped wording
Thankfully, the new exemption is significantly clearer – it covers "the export, reexport, retransfer, or temporary import of a defense article or the performance of a defense service" made by or for the US government, not just the "temporary import, or temporary export, of any defence article, including technical data or the performance of a defense service". As technical data exports are permanent, the new regulation is worded correctly.

Comment

Is the new 22 CFR 126.4 better? Yes – this is a huge and long-awaited improvement. However, when it comes to those who export to 22 CFR 126.1 countries on behalf of the US government, but deliver to a non-US government party, a licence or other approval will be necessary in most cases. Exporters outside the 22 CFR 126.1 proscribed countries must obtain a written direction from the right person in the relevant US government agency and check all of the boxes mentioned above.

(1) For official use by a department or agency of the US Government…
(2) For carrying out a cooperative project, program, or other activity in furtherance of an agreement or arrangement that provides for the export, reexport, retransfer, or temporary import of the defense article, or the performance of activities that constitute the defense service, and is one of the following:

(i) A binding international agreement to which the United States or any agency thereof is a party; or
(ii) An arrangement with international partners authorized by Title 10 or 22 of the United States Code or pertinent National Defense Authorization Act provisions.

(3) For carrying out any foreign assistance or sales program authorized by law and subject to control by the President by other means.
(4) For any other security cooperation programs and activities of the Department of Defense authorized by law and subject to control by the President by other means.

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